The development of the Drosophila eye represents a compelling model system to address the role that specific genes play in the control of cell growth, differentiation and cell death that occur during the development of the nervous system. Classical dominant alleles of the Drop (Dr) locus are associated with a small eye phenotype, homozygous lethality and genetic interaction with the cell cycle regulatory gene, string (stg). A recessive requirement for the Dr locus in the retina was revealed following mosaic analysis in which clones of cells homozygous for a lethal revertant of Dr1 contained extra photoreceptor cells. The phenotypes associated with Dr mutants were localized by deficiency mapping to two closely linked cytogenetic intervals in 99A shared by 4 independent Dr alleles. Mutations in Drop distal (Drdis) identify a lethal function associated with the dominant eye phenotype. Mutations in Drop proximal (Drprox) identify a second gene responsible for the genetic interaction with stg and the supernumerary photoreceptor cell defect. The formation of extra photoreceptor cells in Drprox mutant eye imaginal discs was analyzed using a viable allele highway (hwy) (gift of H. Stocker and E. Hafen) and also in clones homozygous for lethal alleles following flp-mediated recombination. Expression of neuronal markers (elav or 22C10) in developing photoreceptor cells appeared normal in the third instar eye disc but clusters containing additional positive cells were readily detected in 20 hr pupal eye discs. In contrast, expression of elav was detected in cells located in the basal region of the mutant eye disc and in the optic stalk. The number and position of these cells suggests that they are Retinal Basal Glial (RBG). Thus, one function of Drprox is to inhibit a cell signaling pathway that specifies the neuronal fate in non- neuronal cells. The extra photoreceptor cell phenotype of Drprox alleles is complemented by strong stg point mutants but revealed by transcriptional null alleles of stg and chromosomal deficiencies. In the wild type eye imaginal disc, stg transcripts are localized to a narrow stripe of photoreceptor cell precursors immediately adjacent to the morphogenetic arrow and in single precursors in more anterior regions. In homozygous hwy and trans- heterozygous hwy/DrMio revertants or hwy/drFA30 mutant discs the anterior stripe of stg RNA was not detected suggesting that the cell fate defects in Drprox correlates with a defect in the pattern of stg RNA expression. These results suggest that Drprox mutants may represent novel eye specific alleles of stg or identify an additional gene closely associated with stg eye specific cis-regulatory sequences. The absence of a mitotic inducer (stg) in Drprox mutant eye discs does not lead to mitotic defects posterior to the furrow suggesting that one aspect of stg expression in the eye may be redundant for the cell cycle but important for inhibition of neuronal differentiation.